Japan’s economy shrank more than estimated in the April-June quarter, revised data showed yesterday, piling pressure on the government to delay another sales tax hike, while the central bank faces calls to expand its stimulus.
The figures will come as a blow to Japanese Prime Minister Shinzo Abe, as his program aimed at rejuvenating growth struggles to gain traction.
GDP growth in the first three months of the fiscal year shriveled 1.8 percent from the previous three months, worse than the previously estimated fall of 1.7 percent, Japan’s Cabinet Office said. It was the world’s third-largest economy’s steepest quarterly drop since the 2011 quake and tsunami disaster.
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On an annualized basis — if the performance was replicated over a 12-month period — GDP contracted 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.
The disappointing result was largely caused by the negative impact of April’s sales tax hike —the first in 17 years — which was introduced to lift revenue and reduce the country’s massive national debt.
Prior to that, the economy had been on the upswing as Abe’s growth blitz, dubbed Abenomics, helped sharply weaken the yen, giving a lift to exporters’ profitability and driving a stock market rally last year.
A huge monetary easing campaign by the Bank of Japan (BOJ) was a cornerstone of the program.
However, the initial enthusiasm that greeted Abenomics has given way as the effect of the cheaper yen has petered out while doubts have emerged over Abe’s willingness to press on with the structural reforms Japan needs. Yesterday’s weak figures could force Tokyo to reassess a second tax increase planned for next year.
“Expectations will likely strengthen for further monetary easing by the Bank of Japan and more spending by the government,” SMBC Nikko Securities chief economist Junichi Makino said.
The BOJ is expected to act at its Oct. 31 policy meeting, while the government is thought to be compiling an extra spending plan worth about ¥5 trillion (US$48 billion) as early as autumn, he told Dow Jones Newswires.
The government and the BOJ have maintained the impact on the economy of the sales tax hike from 5 percent to 8 percent has been minimal.
After a policy meeting last week, the bank decided against unveiling any new stimulus measures, with BOJ Governor Haruhiko Kuroda sticking by his rosy view of the economy.
The government is expected to decide by the end of the year whether it will go ahead with raising the tax rate to 10 percent in October next year, as planned.
Capital Economics said it expects a modest recovery in the second half of the year.
While the headline GDP figure was broadly in line with expectations, the details were rather discouraging, Capital Economics said, noting that corporate capital investment was revised from a fall of 2.5 percent to a 5.1 percent drop.
“Overall, we still expect the recovery to resume in the second half of the year. That said, output will probably rebound only modestly in the third quarter,” Capital Economics’ Japan economist Marcel Thieliant said in a note.
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